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Thursday, February 18, 2016

SPX Update: Market Reaches Inflection Point

Last update, I noted a few important points regarding the current rally, and I'd like to briefly revisit some of those. First:

Regarding the chart above, I'd like to note that this pattern allows for
a lot of leeway at either inflection point: Blue 2 can't be fully
eliminated until 1947 is claimed, and black C only needs to be higher
than 1947, but could also run even higher than shown. This is the type
of pattern where we'll have to play it by ear in real time, and watch
for a turn that's followed by an impulsive decline -- that would help
with early confirmation that it's "the" turn.

and:...front-running should be done only with extreme caution.

I'm highlighting those points because I also talked about this as a "sucker rally," and mentioned that it appeared a significant decline could be pending upon its completion. The reason I also wrote the italicized portion (above) into that update is because "sucker rally" does NOT mean we should ignore the present. At present, we have a strong rally of an ambiguous nature with unclear targets. At times like this, I believe it's important to have patience, and not get too far ahead of the price action.In fact, even though these updates are almost entirely forward-looking, I don't believe we ever need to get too far ahead of the present. Why?

To answer that, let's start with the chart below. Even in a market as ambiguous as this has been, you'll recall that the market told us that a rally was at least a 50/50 probability after a retest of the low (and it told us this back on February 8, before we had even retested the low! See chart below.).

After we saw a rally begin from the black B inflection point, we had our first solid clue that it was time for shorts to be cautious -- and immediately thereafter, we knew we were up against a C-wave rally (recall that C-waves are third waves, and therefore almost always strong trending waves) -- in this case, a C-wave of indeterminate wave degree.

The point I'm getting at is that even in a market as vague as this one has been all month, we still had solid signals from the market that told us, in order:

1. That we should expect at least a retest of the low.
2. That said retest of the low had at least a 50% chance of marking a bottom.
3. That any pending rally from said bottom would be strong.
4. That a C-wave rally (of indeterminate wave degree) had begun off the retest.
5. And not to short randomly into that rally -- i.e.: not to front-run, but to await an impulsive turn.

In other words, I don't believe we need to get too far ahead of things because the market usually guides us along the way.

With that thought in mind, let's look at the SPX chart in order to better visualize where we appear to be now, and to visualize some of the potential dividing lines heading forward:

As we can see on the chart above, the rally still has many options, which is why more cautious traders will watch for an impulsive decline -- although nimble traders will likely note that we've now pushed pretty far into the blue (2) inflection point and are pretty close to its invalidation level (and if I have to explain the significance of that, then you're not a nimble trader and you should just ignore that statement entirely).

In any case, until we see an impulsive decline, I simply can't make a clear call as to where this rally will end.

Briefly, here's one more chart of interest. I've shown this trend line before, and it's worth noting that "here we are again":

In conclusion, we're well into the blue (2) inflection point, so from a structural standpoint, this is one zone that could end the rally, and the R/R is much better than it was in the last update -- however, that is NOT TRADING ADVICE, because this pattern is ambiguous, so I simply don't know if the market will view this price zone as significant or not. If we see an impulsive turn from here, then we'll have our first clue; if we don't, then the pattern calls for continued patience for bears. Trade safe.

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